Fundamentals of Futures & Options Markets (4th Ed.)

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Fundamentals of Futures & Options Markets (4th Ed.) by John C.Hull

For undergraduate courses in options and futures.This introduction to futures and options markets is ideal for those with limited background in mathematics. Based on Hull’s Options, Futures and Other Derivatives, one of the best-selling books on Wall Street and in the college market, this text offers an accessible presentation of the topic without the use of calculus.

This book has been written for undergraduate and graduate elective courses offered by business, economics, and other faculties. Many practitioners who want to acquire a working knowledge of futures and options markets will also find the book useful.

I was persuaded to write this book by colleagues who liked my other book Options, Futures, and Other Derivatives, but found the material a little too advanced for their students.Fundamentals of Futures and Options Markets (formerly Introduction to Futures and Options Markets) covers some of the same ground as Options, Futures, and Other Derivatives—but in a way that readers who have had limited training in mathematics will find easier to understand. One important difference between this book and my other one is that there is no calculus in this book.

The text can be used in a number of different ways. Instructors who like to focus on one- and two-step binomial trees when valuing options may wish to cover only the first 10 chapters. Instructors who feel that swaps are adequately covered by other courses can choose to omit Chapter 6. There are many different ways in which Chapters 11 to 21 can be used. Instructors who feel that the material in Chapters 14, 16, 17, or 18 is too specialized can skip one or more of these chapters. Some instructors may choose to devote relatively more time to futures and swaps markets (Chapters 1 and 6); others may choose to structure their course mostly around options markets (Chapters 7 to 21). The three new Chapters (19 to 21) contain very little mathematics and do not rely heavily on earlier material. I find they work well when used in the last two to three weeks of a course regardless of what, is covered earlier.

Chapter 1 provides an introduction to futures and options markets and outlines the different ways in which they can be used. Chapter 2 describes the mechanics of how futures and forward contracts work. Chapter 3 shows how forward and futures prices can be determined in a variety of different situations by using pure arbitrage arguments. Chapter 4 discusses how futures contracts can be used for hedging. Chapter 5 deals with interest rate markets. Chapter 6 covers swaps. Chapter 7 describes the mechanics of how options markets work. Chapter 8 develops some relationships that must hold in options markets if there are to be no arbitrage opportunities. Chapter 9 outlines a number of different trading strategies involving options. Chapter 10 shows how options can be priced using one- and two-step binomial trees. Chapter 1 I discusses the pricing of stock options using the Black-Scholes model. Chapter 12 extends the ideas in Chapter 11 to cover options on stock indices and currencies. Chapter 13 extends the ideas in Chapter 11 to futures options. Chapter 14 discusses volatility smiles. Chapter 15 provides a detailed treatment of hedge parameters such as delta, gamma, and vega. It also discusses portfolio insurance. Chapter 16 explains how to calculate and use the value-at-risk measure. Chapter 17 covers the use of multistep binomial trees to value American options. Chapter 18 focuses on interest rate options. Chapter 19 covers exotic options, mortgage-backed securities, and nonstandard swaps. Chapter 20 covers some relatively new derivative products: credit derivatives, weather derivatives, energy derivatives, and insurance derivatives. Chapter 21 describes some well-publicized derivatives disasters and reviews the lessons we can learn from them.

At the end of each chapter (except the last one) there are seven quiz questions that students can use to provide a quick test of their understanding of the key concepts. The answers to these are at the end of the book.

Learn about Option (finance):

In finance, an option is a contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the option. The strike price may be set by reference to the spot price (market price) of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium. The seller has the corresponding obligation to fulfill the transaction – to sell or buy – if the buyer (owner) “exercises” the option. An option that conveys to the owner the right to buy at a specific price is referred to as a call; an option that conveys the right of the owner to sell at a specific price is referred to as a put. Both are commonly traded, but the call option is more frequently discussed.

The seller may grant an option to a buyer as part of another transaction, such as a share issue or as part of an employee incentive scheme, otherwise a buyer would pay a premium to the seller for the option. A call option would normally be exercised only when the strike price is below the market value of the underlying asset, while a put option would normally be exercised only when the strike price is above the market value. When an option is exercised, the cost to the buyer of the asset acquired is the strike price plus the premium, if any. When the option expiration date passes without the option being exercised, the option expires and the buyer would forfeit the premium to the seller. In any case, the premium is income to the seller, and normally a capital loss to the buyer.

The owner of an option may on-sell the option to a third party in a secondary market, in either an over-the-counter transaction or on an options exchange, depending on the option. The market price of an American-style option normally closely follows that of the underlying stock being the difference between the market price of the stock and the strike price of the option. The actual market price of the option may vary depending on a number of factors, such as a significant option holder may need to sell the option as the expiry date is approaching and does not have the financial resources to exercise the option, or a buyer in the market is trying to amass a large option holding. The ownership of an option does not generally entitle the holder to any rights associated with the underlying asset, such as voting rights or any income from the underlying asset, such as a dividend.

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